gold versus paper and the keynes experiment

this may be encyclopedic, but it will warm your heart on those cold dark raided nights............ i teared up when i read it.........then i stood up and cheered ......gave it a fav button in my investing sites for reread.

"It was possible to cheat the savers only because initially, the dollar was gold backed. Then the system became dependent on the paper dollar, and it was extremely difficult to get out of this bind.

Had it been openly acknowledged that paper is not as good as gold, the savers would have been able to save in physical gold and use the paper only for transactions."

No, it was possible to cheat the savers because there was no alternative currency to the coercively-imposed USD/FRNs, other than physical gold, post 1913. The currency was centrally-issued and participation coercively enforced on individual states, contrary to the American Constitution, I believe.

Physical gold is awkward for transactions. Thus bullion banking was created, in which paper represented gold in storage. Provided there is open competition and transparent bookkeeping amongst bullion banks issuing notes, the system self-stabilizes and fraudulent and imprudent banks are exposed and disappear. Prudent savers will move their savings out of bad banks. This free, open, gold-backed system works. It is critical that there be no coercion for it to function. This rules out central banking in a single currency. There is a decent recent article on zerohedge about this. An incisive call for the end to central banking is made by Robert Wenzel to the Fed here. The conclusion applies equally to European (actually, any) central banks.

Previous flawed implementations of centralized coercive gold-standard currencies are discussed in the paper linked in the first comment in this thread.

It is vital to a currency's value that the market perceives it as being stable and universally acceptable. For thousands of years gold served the purpose well, and trustworthy competitive gold-credit currencies have existed and functioned well for short periods (supporting US westward expansion in the 1800s, for instance), until centralist coercive authority was used to put the independents out of business, because it was to their benefit.

The right answer is not to try to explicitly split the functions of currency, a stable one for savings and inflatable fiat for transactions, which just creates inefficiency. The right answer is to have stable currency for both functions, which is ensured through competition. It is not impossible that one or more currencies become specialized towards higher-velocity applications ("for transactions"), but I submit that any fiat currency attempting to compete with a market-tested gold-backed currency will have very high velocity indeed, as wealth in the market will rapidly exit it for sounder ground. Its existence under the scrutiny of the market can only be sustained through coercion.

Which is where we have been for a hundred years, and now the market is shaking off its shackles.

And so after the exit, Greece would have the option of either defaulting on their debt anyway or printing New Drachmas in order to cover the budget deficit. Since the investors would keep holding Euros (or gold) rather than New Drachmas as long term savings, this would merely cause a serious inflation by debasement in the New Drachma, but not improve the Greek position in real terms.

​but also:

You will see the ECB print some money, but only in order to avert bank runs and chain reactions of bank collapses and in order to prevent outright price deflation, but no more. The debt will go, and the savers will find a medium that can store savings much better than debt. They will learn their lesson.

​Why do you think in one case printing money will cause debasement of a fiat currency, but not in the other? When there is inflation inside the Euro zone, it will find itself in the same situation as Greece.

__________________

"You can't breathe dead hippo waking, sleeping, and eating, and at the same time keep your precarious grip on existence."
Conrad, Heart of Darkness

That's a very good question. A reasonable answer is provided by what is called the 'credit theory of money' or 'theory of endogenous money'.

Let us assume that most of government expenditure is consumption (as opposed to investment that increases the future GDP). Now you need to keep track of the total credit volume in the banking system. By the term 'credit volume' I mean both the monetary base and all the credit created by the commercial banks. This quantity happens not to coincide with any of the M0,M1,... money supply definitions.

Then we narrow things down to the part of the credit volume that is available for consumption. This step is called 'disaggregation of credit' in the literature. The part of the credit volume that is available for consumption consists, for example, of consumer loans, credit card loans and government debt, as far as these are held on the balance sheet of the banking system against credited credit volume. (The disaggregation part is done in order to distinguish it form the credit volume that's available for purchasing investment assets. If a mortgage ends up on the balance sheet of the banking sector, this tends to increase house prices rather than consumer prices, etc.)

Now you can show empirically that changes in the part of the credit volume (my definition above) associated with consumption correlate with consumer price inflation some 6-9 months down the line. But it is only changes in credit volume. Similarly, changes in the credit volume related to mortgages correlate with real estate prices some 9-12 months down the line, etc. In contrast, if such loans are purchased with actual savings (i.e. deferred consumption) rather than credit created by the banking system, they are not inflationary (at least at first order).

Now here is the distinction between which money printing causes inflation which doesn't.

If a central bank buys a bad loan from a commercial bank as part of a bailout, this does not increase the consumption part of the credit volume. It merely reshuffles items around on the balance sheets of the banking sector. In fact, the inflation that corresponds to this part of the credit volume already occurred some time ago when this loan ended up in the banking system for the first time. This is the inflation that happened in the past.

If the central bank purchases newly issued government bonds, however, the consumption related part of the credit volume (my definition above) increases. This leads to consumer price inflation some 6-9 months down the line.

If you watch what the ECB is doing, you see that they do in fact bail out the commercial banks. But this is a reshuffling of assets that are already held inside the banking system. But the ECB is fighting new government budget deficits. Do you remember when Draghi stopped buying Italian bonds in November 2011 until Berlusconi gave up and the new Italian government announced to balance the budget more quickly? In particular, the ECB is not keeping the interest rates on government bonds artificially low and thereby provides a strong incentive for the governments to balance their budgets.

Britain, in contrast, ordered the Bank of England to buy a sufficiently large part of the government's budget deficit such as to keep interest rates low. And this is a lot. In quite a good agreement with my remarks above, this did lead to higher consumer prices. You can just compare Britain with the Euro zone. Britain had inflation rates around 5% (and they tend to be understated) since 2009. The Euro zone had about 2% (and these figures are not systematically fudged).

I expect this gap to widen more and more as Britain finds out that the trade deficit persists (simply because they don't have enough industry that would produce anything that could be sold abroad - at least not in sufficient volume) and keeps printing the government deficit.

In contrast, keeping the Euro viable depends on not printing the ongoing budget deficits.

But this is not the only difference between Britain and the Euro zone. The other one is that the Euro zone has a huge gold reserve and that they immediately benefit when gold goes up in dollars. Britain, in contrast, has less gold (they have half the population of Germany but less than a tenth of the gold) and more dollars. So when gold is finally revalued, Britain will benefit less than the Euro zone. In fact, the Euro zone can basically always escape their debt problems by 'pressing the red button' and by triggering the gold revaluation. Technically speaking, Britain might be able to do the same, but it is not that credible as they have always been too loyal to the U.S.

The euro skeptics of the UK luckily realized that with the £ at least we can still print our way out of debt if necessary,

This was the one major misstep of the century made by Britain. They will regret it for at least another one because this is what is going to wipe out much of the private wealth of their country. You may have read that Britain has been running a trade deficit of about 5% GDP and a budget deficit of about 8-10% GDP. Yes, they are printing their budget deficit. I don't have the figures at hand, but the Bank of England must own about 60% of the outstanding gilts, and with the continuation of their quantitative easing, they have been purchasing more than half the current budget deficit.

Tell me, what do you expect to happen to their currency? As soon as the foreigners stop purchasing sterling, their exchange rate will be folded, cutting their trade deficit to zero. The problem is that the UK economy is structured in such a way that it cannot live without a continuous stream of imports. So, yes, they will continue to print in order to keep the imports flowing. This is going to destroy the pound. Take this as a prediction. I don't know when, but at some stage, they will be on their knees begging for admission to the Euro. Take that as prediction number two. They will have to use their remaining pathetic gold reserve in order to buy into the Euro (the Eurosystem now has 65% of its reserves in gold), and from that point they will be a weak member of the Eurosystem with little gold on their own. They will do this because only the Euro allows them to get their international trade going. That's prediction number three: Britain will eventually sell most of its gold for Euros. That will be for mere survival. Apart from Japan, I cannot think of any other country that's in such a bad shape.

Victor, that it was supremely foolish for the UK to have sold all their gold for bottom-dollar prices is true. That, failing to support the pound with gold, it will depreciate if they continue their profligate ways is also true. Yes, the UK needs physical imports. It exports products and services to balance. Lately, things haven't been balancing. No real disagreement here.

In normal competitive international trade, a country (or region) can only run a trade deficit for so long. A trade deficit means a country is consuming more than it has been producing. Effectively, wealth is leaving the country during deficit. For short periods, countries can play with monetary policy to try and stem the tide, but always, the basic imbalance must be addressed, or obligations (eg debt to foreigners, foreign ownership, etc) renegged upon. Countries can pick fiscal prudence and sensible monetary and economic policy, and compete their way out of trouble, or they can default, or some combination. This is where we are at with USD. That it was forced down every country's throat allowed the US to run deficits for so long. The market is finally addressing this.

I certainly hope your predictions do not come true for our friends in the UK. I hope they choose to default to foreigners, re-establish sound banking principles, sound fiscal and economic policy, and move on, much as the Icelandic are doing.

For many on this blog, it is hard to digest and or accept what you are offering since that would be an admission they have been used their entire lives by a very small core of centrally controlled bankers

I can't speak for all on the blog, but if I am any example, many on this blog accepted that idea long ago. I am curious that Victor seems to see the European situation so differently.

That's very neatly put. Yes, the fact that the dollar was initially on a gold standard, was the key prerequisite that enabled

(1) big government in the U.S.

(2) the cheating of the savers world wide

No and no. See post above. The problem was in trusting central banking, first intra-country, and then internationally, with Bretton Woods. Competing gold-backed currencies can work. A properly implemented gold standard precludes monetization of big government spending.

The Euro, in contrast, is very honest. They openly admit that the Euro is not as good as gold. You can see this from their balance sheet. The ECB has the mandate to devalue the Euro by less than, but close to 2% relative to goods and services each year. That's openly announced. In contrast, gold has been rising relative to goods and services since the introduction of the Euro. The Euro is explicitly advertised as a medium of exchange, i.e. to be used for transactions, but not to store your long term savings. The balance sheet of the Eurosystem tells you that the European central banks themselves do not use a medium of exchange (US$) to store their reserves. No, they use physical gold. They lead by example. Everyone who cares to look, can see how it works.

Victor, do you happen to have handy European private physical gold holding numbers to support that, as a percentage of savings? If it is true that Europeans, as a result of this honesty, save in gold, it should show up in private ownership numbers. I am operating under the notion that very little private Euro-wealth is in physical gold, and that, much like here, most of it is in conventional Euro-denominated assets. I'd love to see the numbers.

If it is low now, but the expectation is that this will shift dramatically in the near future, then I think that means a fire-sale in Euros in order to buy gold.

Whenever a country issues a fiat currency it does so to play games with fiscal deficits and monetary policy in an attempt to manipulate balance of trade to the country's advantage.

The Euro zone doesn't. It was designed in such a way that it has a balanced trade account.

I'm not sure the trade deficit of the Eurozone as a whole is easily knowable. It is quoted, nonetheless, and non-zero, of course, and it varies. E5.3B in January, and E3.7B in Feb. I am sure it is dwarfed by the US. Yup, just checked here. $46B in Feb 2012.

Hard-working Germans don't want to pay for Greek pensions.

Nobody is forcing them. It was their decision to put their savings into Greek government debt. They could have purchased physical gold instead. This would have starved the spending spree of the south on day one.

I don't think it exactly was everyman's position that their government invest in Greek debt on their behalf, but I'll let it go. So, if I understand you correctly, you are advocating that thrifty Germans call the banker's bluff, sell their Euro-denominated assets, and purchase physical gold with their wealth? I agree that had they not trusted their bankers, they wouldn't be in this mess.

You see, the true lesson here is that it is the behaviour of the saver that enables the debtor (if the saver purchases the debt of the consumer) or that renders the debtor powerless (if the saver purchases physical gold).

Again, let's look at how the ECB handles this. They don't purchase the debt (US$) of the consumer (United States). No, they have their reserves in physical gold.

Once the German savers learn this lesson, the internal imbalances of the Euro zone that have wrecked the finances of several governments will automatically adjust.

I think you may be right that Europeans begin to save in gold as they learn their lesson. But I think what that in turn implies is a run on the Euro, and the ECB will be required to print like heck to keep up, thus devaluing the Euro. They can sell some gold for a little while, but it will run out quickly, as base money and reserves are a tiny fraction of the outstanding wealth that might be subject to conversion to gold in such a scenario. I think. Data would be good to have, as I said above.

I shouldn't be too harsh with the German savers though. Someone at FOFOA's blog had some study saying that the German private sector has acquired more than 1000 tonnes of gold since 2008. Well, according to this measure, they are actually doing very well. But the debt has not yet been cleared from the system. That is still due over the next couple of years. But luckily some already have the gold necessary in order to fill the void when the debt disappears.

Victor

I'm sorry, to where does the debt disappear? Are you imagining the deflationary bank-run scenario above, so Euro-banks are either forced to call loans to raise cash, or sell their gold reserves directly to the German public? Seriously, didn't about E400B just get printed the other day, and get swallowed up over the weekend?

"If a central bank buys a bad loan from a commercial bank as part of a bailout, this does not increase the consumption part of the credit volume. It merely reshuffles items around on the balance sheets of the banking sector. In fact, the inflation that corresponds to this part of the credit volume already occurred some time ago when this loan ended up in the banking system for the first time. This is the inflation that happened in the past."

So, the amount now freed up on the banks' balance sheets for making further loans, purchasing equities, buying real estate or buying additional gov't debt [before requiring yet another bailout further down the line] does not count?

"If the central bank purchases newly issued government bonds, however, the consumption related part of the credit volume (my definition above) increases. This leads to consumer price inflation some 6-9 months down the line."

So you are going to tell me with a straight face that major 'commercial' banks who are buying newly issued government bonds are NOT doing so at the behest of and incentivized by Central Banks? And that the two types of transactions truly are of a fundamentally different nature? "Sterilized" QE really works?

"What we will rather see is further defaults and debt restructuring inside the Euro zone. That's fine. There is an excessive amount of debt which needs to be cleared from the system. You will see the ECB print some money, but only in order to avert bank runs and chain reactions of bank collapses and in order to prevent outright price deflation, but no more. The debt will go, and the savers will find a medium that can store savings much better than debt. They will learn their lesson. But this is an issue between savers and debtors and not an issue between savers and the issuer of the currency (as it is in the U.S.)"

Uh-huh. OK. Great. So none of the things outline in the graph in the link below are a problem, right? And the fact that anyone holding assets denominated in Euros when the 'revaluation' happens will lose out in a major way is OK, because at least the value of the Euro will not go to zero (outright, complete 'default' on the currency) as it is 'backed' by gold, thus the denominator will always be non-zero? (sorry, graphic too big to fit on this thread, open in new tab here)

In particular, the ECB is not keeping the interest rates on government bonds artificially low and thereby provides a strong incentive for the governments to balance their budgets.

​The ECB does keep interest rates on government bonds artificially low because they create a market for them that wouldn't otherwise exist. If the ECB did not bid on those bonds, the bonds would have higher interest rates or not sell. And we know that the ECB does buy government bonds, through their Securities Markets Program. On their own website they discuss the rationale for the program, and it is to effect changes in interest rates:

Open market operations

The Eurosystem’s regular open market operations consist of one-week euro liquidity-providing operations (main refinancing operations or MROs) as well as three-month euro liquidity-providing operations (longer-term refinancing operations or LTROs). MROs serve to steer short-term interest rates, to manage the liquidity situation, and to signal the stance of monetary policy in the euro area, while LTROs aim to provide additional, longer-term refinancing to the financial sector.

In Figure 7a, I see a sharp rise in ECB buying of sovereign debt starting at the 2008 crunch. More recent data would be interesting.

"... keeping the Euro viable depends on not printing the ongoing budget deficits."

Yes. And that would require the resolve of the ECB not to buy sovereign bonds of deadbeat countries, including from private banks. That appears not to be the case given the big uptick in ECB bond purchases shown in figure 7a, but I'd like to see more recent data.

As this article points out in the summary, it is a pay-me-now or pay-me-later choice. If fiscal deficits are monetized directly, the inflationary effects Victor describes above are immediate. If the central bank waits for the private banks to fail, and then buys the sovereign debt, the inflationary effect is delayed somewhat. But it doesn't go away.

If the sovereign bonds have been defaulted upon (a deflationary event) and bought at discount, it is not that the central bank bond purchase is not inflationary, it is just that it may be monetarily offset somewhat by the deflationary default. It is the attempt to manage this battle between inflationary and deflationary forces that Wenzel (linked above) refers to:

The noose is tightening on your organization, vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or, if you stop printing, another massive economic crash will occur. There is no other way out.

The US is in worse shape with both fiscal and trade deficits. The Eurozone having a more balanced trade situation reduces the demand for money-printing somewhat, perhaps, but they might have a larger aggregate fiscal deficit. Anyone got data?

If there are only gold coins circulating, but no credit money, yes, I agree with you. But the 'trick' of the gold standard was that there was paper allegedly backed by gold in addition to the coins. This cannot work. The one who has the gold has the real asset free of counterparty risk. The one who has the gold backed note merely has a promise from someone (bank, central bank, government) that the gold standard will be in place forever. As soon as there is a risk that the rule of the game might change some 50 years down the line, the gold coin and the paper note are not actually equivalent. Also, as soon as there are gold loans in the system, physical gold is undervalued and will be taken out of circulation. Precisely what happened and what broke the gold standard.

Victor, do you happen to have handy European private physical gold holding numbers to support that, as a percentage of savings?

Well, so far people have way too much debt and too little gold, that's for sure, and it's true everywhere both in America and in Europe. But while gold ownership in the U.S. was illegal until 1974 (how f**ked up a system was that?) , it never was in Europe, and there is a tradition of gold ownership there and a lot of ancient gold in the families that is passed on from generation to generation. Germany had the confiscation by the Nazis, but after WW2 apparently they have been catching up. I think the study that was mentioned at FOFOA's said there was about 10000 tonnes of private gold in Germany, some 1000 tons of which had been purchased after 2008 (that included jewellery).

then I think that means a fire-sale in Euros in order to buy gold.

I agree. This will happen, and it will increase the velocity of money and cause inflation in the Euro zone.

E5.3B in January, and E3.7B in Feb. I am sure it is dwarfed by the US. Yup, just checked here. $46B in Feb 2012.

The trade balance of the Euro zone oscillates around zero. It is small positive in some years and small negative in others. This was the major design criterion.

I don't think it exactly was everyman's position that their government invest in Greek debt on their behalf, but I'll let it go.

It would have been cleaner to write it off immediately and teach the savers a lesson, but I view this as a bailout that is internal to Germany. The CB bailed out the private holders of southern debt. Rather than getting an immediate default, the CB took it on their books where it can eventually be paid off by revalued gold when the times comes (or even be worked off by Greek labour in the very far future).

the ECB will be required to print like heck to keep up, thus devaluing the Euro. They can sell some gold for a little while, but it will run out quickly, as base money and reserves are a tiny fraction of the outstanding wealth that might be subject to conversion to gold in such a scenario.

I don't think the ECB will sell any gold under, say, E10000/ounce, probably way higher. If the savers want gold, they can bid for it in the private market. This will eventually drive the pice up sharply, but, hey, the ECB is not in the gold price suppression business, but they rather like a hign gold price. So they will let the private market do the bidding for the gold.

There is one exception to this rule. There have been back room deals between the Euro zone central banks and the oil producers to deliver cheap future oil against future gold. These deals are probably around 300 bbl/ounce or more (corresponds to $30000/ounce gold price), i.e. secretly at the new target gold price. These agreements will be honoured, and the European CBs will ship gold to the oil producers. But they get something in turn: oil that is very cheap in gold.

I'm sorry, to where does the debt disappear?

Some of it will disappear through defaults. Some of it will be inflated away when the velocity picks up. Some of it will end up in the CB books and be paid off with revalued gold. But the major point is that the true counterparty-free asset of the system, gold, will be revalued so much that the debt isn't that bad in comparison.

So, the amount now freed up on the banks' balance sheets for making further loans, purchasing equities, buying real estate or buying additional gov't debt [before requiring yet another bailout further down the line] does not count?

The ECB needs to make sure that the commercial banks don't just use the new liquidity in order to buy more government bonds. In the present setup, they cannot entirely prevent this from happening, but note two details:

1) The ECB lets interest rates creep up. So even if a bank has bought more government bonds, they will soon be under water on this position

2) The ECB requires the bank to post cash collateral for these LTRO repos, and so if the bond goes down, the commercial bank needs to post cash with the ECB.

That's a nice double whammy for the commercial bank and should teach them the lesson rather soon.

So you are going to tell me with a straight face that major 'commercial' banks who are buying newly issued government bonds are NOT doing so at the behest of and incentivized by Central Banks?

Exactly, as I wrote above, the ECB is going to spoil this party in a major fashion. The commercial banks are going to get bruised quite seriously if they do this.

Watch the action in French government bonds. I suppose there will be a nice little crisis until Hollande commits to a balanced budget. Berlusconi 2.0 if you wish.

And that the two types of tranactions truly are of a fundamentally different nature? "Sterilized" QE really works?

I think I answered this question. For the transactions to be different, the commercial bank must be prevented from buying more government debt with the free liquidity.

Thanks for getting bacq. I think it would be more useful to answer any direct questions, as I have asked above, than re-quote other explanatory words of mine and then explain further. Resolution of debate requires settling issues before moving on. Thanks for the time in explaining further, but the answer-debt grows, the questions are above and below. We march on...

"If there are only gold coins circulating, but no credit money, yes, I agree with you. But the 'trick' of the gold standard was that there was paper allegedly backed by gold in addition to the coins. This cannot work... physical gold is undervalued and will be taken out of circulation. Precisely what happened and what broke the gold standard."

I grant that central-bank gold standards cannot work. I believe I stated as much. The "trick" is to have the paper not be "allegedly" backed by gold, but in fact backed by gold, a fact created by the free market operating to weed out those who only "allegedly" back their notes. A wonderful quote from the zerohedge article referenced in the second post of this thread:

"If the greatest trick the devil ever pulled was convincing the world he didn’t exist, the greatest trick our central bank ever pulled was convincing the world we couldn’t live without it."

It is not the gold-backed nature of previous attempts that have caused failure. It is their centralized nature.

Another direct question, preferably to be answered after others above: Do you acknowledge that competing gold-backed currencies and centrally-managed gold-backed currencies are different in any way, and that they might exhibit different systemic behaviours?

Further, you wrote:

This [fire sale of Euros for gold] will happen, and it will increase the velocity of money and cause inflation in the Euro zone.

And:

Some of [the Euro-debt] will disappear through defaults. Some of it will be inflated away when the velocity picks up.

Last I checked, the way monetary economists look at things:

GDP = MV = PQ

Ie GDP is equal to money supply times velocity and aggregate price times quantity.

The only way inflation (ie money supply expansion) and velocity can increase simultaneously is if GDP is rising rapidly. Is this the scenario you envision? I think it is a bit rose-coloured, given what I am seeing out there.

I would summarize my current understanding of your position, given statements above and elsewhere on this blog is that:

1) productive people and private institutions, ie creditors, ("Germans" have been mentioned) in the Eurozone should go buy physical gold and withdraw their savings and support from their private banking system

2) the ECB should also be harsh on private Euro-banks, and "teach them a lesson"

3) Euro money velocity is going to go up, dramatically so if transactional use and store-of-value are separated successfully as you suggest

4) Euro narrow money supply (ECB balance sheet) will also go up at some rate, whatever the wise central bankers there decide is prudent, but slowly enough that the banks are taught as planned, but fast enough they don't all fail and cause a eurastrophe (which would be inconsistent with 6)

5) the ECB must not monetize countries' fiscal deficits, else the Euro fails

6) Euro real GDP is also on the way up, probably dramatically, working through the numbers from the gold-revaluation inflation figures you quote along with higher velocity, using the most basic of monetary theory

7) despite all the "austerity" forced upon the Euro-people by the ECB, during this period of rapid GDP growth (???), the Euro and the Eurozone pretty much hang together

8) the UK is screwed much worse for not wanting to play the Euro-game

9) Gold-backing of currency can never work. It doesn't matter if there are competing gold-backed currencies that the market can choose. It is the very promise of gold behind the currency that destroys it eventually.

10) Fiat is thus preferable to gold-backed currency for transactional use. Central banks should just wisely use their gold reserves to manage things on our behalf, and will be able to do so indefinitely.

I cannot help but believe that under such pressure both from their creditors and their lender-of-last resort one would not see massive Euro-bank failures and a strong deflationary trend in the private sector, quite inconsistent with the rosy GDP picture you propose.

I fail to see any fundamental difference in the Euro situation that allows them to escape Wenzer's noose.

Perhaps I could save you answering all the detailed questions above, you certainly took a great deal of time in not answering already (again my thanks for that;-) by answering a smaller, simpler set below, which should take you less time.

1) Do you agree with my summary of your position?

2) If not, in what way does your position differ from my summary?

I am interested in achieving resolution of positions. A quick 10 yes/nos for #1 would be a great start, and easy. Thanks.

Another direct question, preferably to be answered after others above: Do you acknowledge that competing gold-backed currencies and centrally-managed gold-backed currencies are different in any way, and that they might exhibit different systemic behaviours?

I know where these questions are coming from - I know there are many goldbugs who want back to the gold standard of the 19th century.

I am not going to answer this one because the question somehow misses the point. Whenever you have two monetary systems with gold (regardless of backed or unbacked), the gold price is highest in the system in which there are fewer loans denominated in gold. The problem is that when you make your medium of exchange equivalent to a weight of gold, someone will lend it and someone else will borrow it. Even if all banks were fully reserved (and you had a government that even wanted and would be able to enforce it - that's even less realistic by the way), people could lend gold from a hoard. Whenever such loans are present, gold will be undervalued in that monetary system, i.e. getting gold by obtaining one unit of currency and then redeeming for gold is cheaper than gold would be without the loans written against it.

As soon as that is the case, the monetary system becomes unstable because owning the physical is better than having a gold claim against some borrower. In this case, the smart people will accumulate the physical and take it out of circulation.

So how do you construct a monetary system in which gold is the most expensive. You need to separate medium of exchange from store of value so that people lend and borrow the medium of exchange. Gold is then only held for long term wealth preservation, but not as an investment, i.e. to be lent to someone else.

If you have two competing currency areas, then gold moves where it is valued most. So if one system has gold loans and the other doesn't, there will be a flow of goods and services and a flow of gold such that the gold moves towards the system that doesn't have gold loans.

This is in fact one of the features of the Euro zone. Although the ECB has a gold reserve, they don't redeem Euros for gold. So the gold price will eventually go very high. This way they can prevent the U.S. from going back to a gold standard because that would involve some loans denominated in gold, and eventually gold would start flowing from the U.S. to Europe. The new U.S. gold standard would be automatically undermined by the much higher gold price in Europe. Now you might ask why the Europeans are doing this. They know that the U.S. have abused the gold standard in the past.

The only way inflation (ie money supply expansion) and velocity can increase simultaneously is if GDP is rising rapidly.

The correct definition of money supply in this equation is what I called 'credit volume' above. This is constant to shrinking. M2 is not exactly equal to that quantity, but you easily get published data, and you can see that M2 in the Euro zone is contracting.

The equation is MV=PQ

where M is the part of 'credit volume' available for consumption, V is the velocity of this component, P is price level, Q is real GDP. So if M is constant or slightly decreasing and V increases, then P increases (Q changes only slowly).

1) productive people and private institutions, ie creditors, ("Germans" have been mentioned) in the Eurozone should go buy physical gold and withdraw their savings and support from their private banking system

I am not saying what people should do. I am not a political activist. I am rather trying to understand what people will do. Yes, the fact that everyone stores their long term savings in other people's debt is a historical aberration, and it will disappear. Yes, the savers will go out of financial assets en masse.

2) the ECB should also be harsh on private Euro-banks, and "teach them a lesson"

The ECB will be harsh on the commercial banks, simply because the ECB will try to preserve the Euro as a currency. They understand perfectly well that they have to prevent the commercial banks from buying more government bonds than the ECB wants.

3) Euro money velocity is going to go up, dramatically so if transactional use and store-of-value are separated successfully as you suggest

Yes, roughly speaking, but the details are more tricky. In order to understand how the price level will behave you need to understand how the part of the credit volume behaves that is used for consumption. So if people withdraw their money from their savings accounts and buy groceries, then the price level will go up.

If, however, the only thing that happened was that people would withdraw money from the banks and buy gold with it, then what would happen is mainly an increase of the gold price, but not of any other price. Well, there would be a second round effect when some people who already have gold suddenly feel rich and start spending, but it would not be the primary effect.

4) Euro narrow money supply (ECB balance sheet) will also go up at some rate, whatever the wise central bankers there decide is prudent, but slowly enough that the banks are taught as planned, but fast enough they don't all fail and cause a eurastrophe (which would be inconsistent with 6)

Yes. I think we agree that all sorts of speculative investments and derivatives are going to fail. This causes a lot of deleveraging in the system. Also government spending will be cut down as everyone has to balance their budgets. This this deflationary. So the ECB has quite some room to print money and to bail out investors, probably way more than most goldbugs think. (What would be extremely dangerous though is to print in order to allow the governments a sustained budget deficit.)

5) the ECB must not monetize countries' fiscal deficits, else the Euro fails

Yes. Since government spending is largely consumption, this would lower the real value of the Euro. The ECB's mandate is to devalue the Euro by less than but close to 2% every year. But not by more.

6) Euro real GDP is also on the way up, probably dramatically, working through the numbers from the gold-revaluation inflation figures you quote along with higher velocity, using the most basic of monetary theory

I think it is clear from above (MV=PQ) that Q is real GDP and PQ is nominal GDP. Again, if V only increases because people buy gold, then the price level might no go up by that much.

7) despite all the "austerity" forced upon the Euro-people by the ECB, during this period of rapid GDP growth (???), the Euro and the Eurozone pretty much hang together

why I don't think anyone will leave the Euro. That's wishful thinking by the U.S. and UK press, but it won't happen because the Europeans are not that stupid. Keep in mind that even in Greece, people want to keep the Euro. What they don't want is that their government lets the creditors push them around.

8) the UK is screwed much worse for not wanting to play the Euro-game

The UK is screwed because they have followed an inflationary policy for decades. Their economy has become used to imports of real goods that were always paid for by freshly printed paper. As a consequence, their economy has lost its industrial base. Now the problem is that once the foreigners stop shipping real goods to the U.K. without real payment, the pound will go down (no surprise), but unfortunately the industry that should start exporting like crazy in that situation, simply isn't there.

9) Gold-backing of currency can never work. It doesn't matter if there are competing gold-backed currencies that the market can choose. It is the very promise of gold behind the currency that destroys it eventually.

See above before (1)

10) Fiat is thus preferable to gold-backed currency for transactional use. Central banks should just wisely use their gold reserves to manage things on our behalf, and will be able to do so indefinitely.

See above before (1). Yes, gold is appreciated most if it is not borrowed and lent. A financial system in which gold is not the medium of exchange does precisely this.

I have read with great interest Victor’s posts, but continue to get hung up. The latest round of ideas seem to center around replacing the USD with Euro as the world’s reserve currency, or at least, preferred medium of exchange. I find this peculiar because of the oft-stated rationale that medium of exchange is basically arbitrary. Why such the Euro preference?

Victor, it seems you justify this preference by indicating the EU has a large gold stash to “back” the Euro thus somehow legitimizing it once this great gold revaluation occurs. Should that happen, though, (and assuming the US does indeed have 8,000 tons of gold), wouldn't the USD, be on somewhat equally “sound footing” [8,000 tons x $30,000/ounce = 8+ trillion]?

In addition, you justify the Euro preference by citing: “The ECB's mandate is to devalue the Euro by less than but close to 2% every year. But not by more.” That right there is the rub. Where have I heard a CB promise of 2% inflation before??

I understand that the world abhors the advantage the USD has but I don’t understand how replacing one Central bank led reserve currency (preferred medium of exchange) with another one solves anything; it just seems to shift the power out of the U.S. and over to Europe - or, could that possibly be your basic (for lack of a better word) agenda – to let the EU have its turn at stealing global wealth when that 2% mandate is achieved by the same types of book cooking and statistical frauds that go on right now. I think trying to sell anybody (especially on a site like this) on the idea that the ECB will somehow operate justly & in the best interest of the people rather than the elite, is preposterous to the point of being just plain silly.

Look, we can hope all we want that (sh)people will see the light and use gold as the only store of value, but we all know that there will always be a lot of people who will always and forever bottle up their wealth in whatever fiat is en vogue and has been spoon fed to them - and as long as that happens, the Central Banks will always have a motivation to inflate and swindle.

I don't know what the answer is to the medium of exchange concept, but I just do not see how transitioning the preference from the USD klepto-inflationary fiat hammer to the Euro klepto-inflationary fiat hammer accomplishes anything globally beneficial. In the end the Euro is just another transitory fiat currency that will surely go the way of the dodo, with all of its brothers and sisters before it. It seems like choosing between the Euro and USD (or whatever other fiat) is either a moot point (because, as you have argued, medium of exchange in your end game is arbitrary) or is just a means to shift power around (which doesn't help normal people like me in any way).

I think we come closer to seeing where we agree and disagree. But I think it is a cop-out to start by avoiding answering a question central to the issue of paper and gold, and what kind of currency and banking schemes work best, so I need to challenge on a few points you make in not answering.

I know where these questions are coming from - I know there are many goldbugs who want back to the gold standard of the 19th century.

I believe these questions are coming not from goldbugs, but from the more informed and productive elements of society. You'd have to be specific when you say "the gold standard of the 19th century" for me to know what you think the goldbugs think. But it doesn't matter, so we can drop it.

Whenever you have two monetary systems with gold (regardless of backed or unbacked), the gold price is highest in the system in which there are fewer loans denominated in gold.

An interesting statement, I'm not sure it makes much sense, though. I think perhaps you are thinking within the box a bit too much, and haven't yet got your head around the fact that in a gold-backed currency regime the price of gold doesn't change. The exchange rate to the currency is fixed, guaranteed through redeemability. You could try to argue that redeemability is unsustainable if you like, but until we get around this basic issue, most of the rest is bafflegab until we get to:

So how do you construct a monetary system in which gold is the most expensive.

To which I would ask why one would want to, as opposed to how one would. If there is no reason to do it, we don't need to consider how. But I think we do know how, just follow Zimbabwe's example, say. Print away, and the price goes up, its actually really easy, just not very helpful.

You need to separate medium of exchange from store of value so that people lend and borrow the medium of exchange. Gold is then only held for long term wealth preservation, but not as an investment, i.e. to be lent to someone else.

This particular division of function is not required to produce a high gold price as measured in a currency. This doesn't follow. Bafflegab, Victor, you are worthy of better.

If you have two competing currency areas, then gold moves where it is valued most.

To say that a good moves to where it is valued most in a market is a fairly tautological statement, Victor. Um, yes. But currency arbitrage efficiently deals with any gold mis-pricings in local currency terms, unless currency- and capital-flow controls are in place, as would be the case in, say, North Korea. If you mean something special by "valued most" please be specific.

So if one system has gold loans and the other doesn't, there will be a flow of goods and services and a flow of gold such that the gold moves towards the system that doesn't have gold loans.

The hypothesis and its proposed consequence are irrelevant until resolution of the point made in bold above. Are you thinking about specific historical examples that you have some data for, or is this all just conjecture? Is there any literature that supports your position on this that you could direct readers to?

This is in fact one of the features of the Euro zone. Although the ECB has a gold reserve, they don't redeem Euros for gold. So the gold price will eventually go very high. This way they can prevent the U.S. from going back to a gold standard because that would involve some loans denominated in gold, and eventually gold would start flowing from the U.S. to Europe. The new U.S. gold standard would be automatically undermined by the much higher gold price in Europe. Now you might ask why the Europeans are doing this. They know that the U.S. have abused the gold standard in the past.

I and I expect many readers fail to see how a failing Euro, as evidenced by a high price for gold in Euros, prevents the US from doing anything. You seem to forget that currencies float in terms of their exchange rates. If gold is sky-high in Euros, but not USD, it means the Euro has collapsed in value as compared to the USD. Why is gold going to go chasing a failing currency? This is a particularly twisted piece of conjecture and illogic, I think, Victor. I agree that the US abused their position as guardians of the global reserve currency. It was a centralized approach. It was bound to fail.

M2 in the Euro zone is contracting.

Ok, so the dramatic uptick in monetary velocity is going to be balanced by credit reduction, to net roughly zero GDP delta. A slick balancing act if it can be achieved. Not at all convinced, though. See "noose", above.

The answers to 1-10 were great, thanks. I could pick nits amongst the responses, above and beyond issues raised above, but what the hey... finally:

Yes, gold is appreciated most if it is not borrowed and lent. A financial system in which gold is not the medium of exchange does precisely this.

You are really keen on getting those functions separated for some strange reason. Odd. We have a system right now in which gold is not the medium of exchange, yet gold is borrowed and lent like mad. A pair of confused and confusing statements.

I suppose I would have to summarize at this point that the scenario you outline for Europe looks quite unlikely to me, but time will tell and we have lots of interesting elections and referenda coming up to give us a feel for what folks are thinking over there.

You have not disproven that a distributed (as opposed to central) redeemable gold-backed currency and banking scheme could be effective, in fact you ducked the issue completely. Central gold-backed schemes fail because the disincentives to over-issue aren't present. As soon as the disincentive to overissue is restored, it works fine. I may propose some details in a possible system in another post. I had captured some notes but lost them.

You failed to effectively argue the case for "loans denominated in gold" (by which I presume you mean leases and swaps) being the sole determinant of currency valuation, because you do not address the issue in bold just below the primary tenet of the argument, above.

We do see the same thing for the Euro/gold ratio - it's going up - and agree more Europeans will be pulling out of the financial system and buying gold, so some common ground has been found.

We disagree on how much faith to put in, and how much benefit we derive from central banks. I remain convinced they are the scourge of the earth, and I stand in that belief with many enlightened thinkers who know the bankers cannot understand what they are doing, and they are deluded in thinking they are in control.

Hi Victor. I am glad to see you here... :-) I was reading your post and here is something what really caught my attention:

"In fact, the Euro zone can basically always escape their debt problems by 'pressing the red button' and by triggering the gold revaluation. Technically speaking, Britain might be able to do the same, but it is not that credible as they have always been too loyal to the U.S."

Can you really just push a red button and revaluate 'something' to your advantage, without a consent of other parties? Or, do you mean that gold would be revaluated just in the Euro zone, while in other countries or regions would have still the lower price? I don't understand this part. Can you explain how it works? Because Europe has gold, they can simply solve their debt problem by pressing a red button, and saying -- Okay, here is the deal: gold was $10,000/oz, but now it is $15,000/oz, and that takes care of our debt. Gold was just revaluated.

How do you know that this will be accepted by other parties? Let's say -- what if Russia, exporting oil and gas to the Central and Eastern Europe, would say -- Great, we have gold, thank you for revaluation. Now, if we would need more gold, we can mine some, or buy some miners in Latin America. We don't need your gold. Look! We have a red button, too, and if we press it -- Wow! Our gas was just revaluated? It just went up, just like your gold, how about that? You have gold, we have gold, and we have also oil and gas...

And one more question, Victor: Can we push red buttons in the Great Britain and the U.S., trying to devaluate gold, while the EU is pushing their red button, trying to revaluate it? That could be a great fun, don't you think? ;-)

If "revaluation" is done by any means other than open-market competition, then we know coercive forces are at work. The use of the term bothered me, but I let it go... If Victor is arguing that there is some body "fixing" the Euro/gold ratio (which he has not, to date, so I give benefit of doubt) then we can know there are tanks rolling the streets of Europe, and severe restrictions around gold import/export and ownership. The omission of this detail about "re-valued gold" in the proposed scenario might be a key aspect of the disagreement on certain points.

I too had let that pass, but it is amongst the most illogical statements made during this argument.

The Euro-zone (no longer a Union?) is not an insulated bubble, and the price of gold is not arbitrary. It is currently manipulated, yes, but too many people want it for the price to go much lower, and nobody can just say, wahoo, gold is 20,000 whatevers, our debt is gone, and it is time to party. It would be time to burn the fiat in the fireplace, and wish you had bought more gold.

__________________

"You can't breathe dead hippo waking, sleeping, and eating, and at the same time keep your precarious grip on existence."
Conrad, Heart of Darkness

The latest round of ideas seem to center around replacing the USD with Euro as the world’s reserve currency, or at least, preferred medium of exchange. I find this peculiar because of the oft-stated rationale that medium of exchange is basically arbitrary. Why such the Euro preference?

The problem is that the dollar was sold to the rest of the world as a store of value (some $8000bn). I don't think the U.S. government plans to service this debt in real terms, and therefore they will collapse its real value. Domestically, it will probably still serve as the medium of exchange, but internationally it will rapidly lose value, and so I guess that companies will prefer other currencies in international trade.

Should that happen, though, (and assuming the US does indeed have 8,000 tons of gold), wouldn't the USD, be on somewhat equally “sound footing” [8,000 tons x $30,000/ounce = 8+ trillion]?

Yes, the U.S. have a lot of gold (by the way, I do think the gold exists). But the dollar has two problems that other currencies (Euro) don't have:

1) The U.S. runs a trade deficit of around 5% GDP. If you would cut this immediately, the country would look like Greece. I don't think the U.S. government will have the balls to collapse it immediately, but they will rather try to spread out the decline over several years. This will cost quite some gold (when foreigners no longer want to hold dollars for the long run).

The Euro zone in contrast has a balanced trade account. No pressure here.

2) There are some $8000bn of U.S. debt held abroad which would love to be exchanged into gold.

The Euro zone in contrast does not have a huge Euro denominated debt held abroad. No pressure here.

So, yes, the U.S. have a lot of gold, but this gold is worth most only after the present problems with the present dollar are gone. In fact, the U.S. government has a huge incentive to hyperinflate the dollar before the gold is used. Let me try a guess and say they know this and they will act accordingly. Jim Rickards nailed it when he wrote

"Hyperinflation produces fairly predictable sets of winners and losers and prompts certain behaviours and therefore can be used politically to rearrange social and economic relations among debtors, creditors, labour and capital, while gold is kept available to clean up the wreckage if necessary."

to let the EU have its turn at stealing global wealth when that 2% mandate

I think this thought suffers from getting the teams wrong. The ECB has nothing to do with the governments of Europe. The ECB has no incentive to sponsor their debt or to fudge the inflation statistics in order to help the governments with their debt.

Also, in the future, gold will be the primary store of value. So this 2% inflation target isn't going to cheat anyone because nobody will hold the currency for the long run.

Coming back to the role of the central bank. This role is completely different in the U.S. (and in the UK by the way). The Fed is subordinate to the Treasury department. The government will basically instruct them how to set interest rates and how much debt to monetize. The past 40 years are full of examples of this. In fact, the CBs of Britain and the U.S. were never allowed into the inner circle of the BIS (formerly the G5) simply because they were considered government puppets and not taken seriously.

I think trying to sell anybody (especially on a site like this) on the idea that the ECB will somehow operate justly & in the best interest of the people rather than the elite, is preposterous

This also suffers from getting the teams wrong. The elite wants a store of value that is stable in the long run. They can use gold (they actually do this massively today) or they own businesses, land, fine art, etc. In any case, they are largely out of currency denominated assets.

The ones who benefit from diluting the real value of the dollar is the government with its huge deficit and with its outsized military spending.

The ones who suffer are those who were duped into holding the currency as savings for the long run. They will either learn to act like the elite or they will continue to suffer.

The interesting point about the Euro zone is that it was set up in such a way that it will guide the people into gold as a store of value, i.e. to behave like the elite, and as soon as the majority of the savers is no longer primarily in currency instruments, it automatically renders the government impotent as far as running deficits is concerned.

In this sense, the setup of the Euro is the victory of the elite over the governments.

but we all know that there will always be a lot of people who will always and forever bottle up their wealth in whatever fiat is en vogue and has been spoon fed to them

This may be an issue with the American culture of big government, in the sense of "the government knows what is best for you." In Europe, you don't find this excessive trust in government (this may seem counter-intuitive as in your press, Europe is usually called 'socialist'), but in the U.S. you had gold confiscation in 1933, you have laws such as the 'trading with the enemy act' which allows the government basically to confiscate anything that's national security relevant. In Europe, in contrast, the governments generally respect private property (when your press calls them 'socialist', they mean that taxes are higher in Europe, but that's something very different).

Finally, in most Asian countries (ex US satellites Japan, Korea) the official currency is not trusted and people buy gold jewelry if they want to save for retirement or for emergencies. The Americans have quite a bit to learn from the Asians, I guess.

please reread what I wrote before item (1). Of course, when I say "value gold higher", this means value in real terms. Also, if two countries have a fixed gold backing for their currencies, this does not mean that their domestic price levels or labour costs are the same in terms of gold.

With this in mind, it should make sense. If you want full details, take a look at my

This particular division of function is not required to produce a high gold price as measured in a currency.

Wrong. For the following reason. People will always be able to borrow the medium of exchange. If the medium of exchange is gold, this gold will be undervalued simply because there is gold denominated credit.

So you get the highest possible gold price if there is no debt denominated in a weight of gold. If you separate medium of exchange from store of value, you achieve precisely this.

In fact, no government will tell you to separate. It will be the people who learn that gold is good to save for retirement and paper money is good to go shopping. This is basically how it works in many Asian countries today in which people don't trust the official currency with their savings.

Ah, by the way, you seem not to know why the presence of loans suppresses the gold price. Perhaps you like this toy model:

Can you really just push a red button and revaluate 'something' to your advantage, without a consent of other parties?

Well, this claim makes most sense if you understand where we are coming from.

You see, originally, i.e. before gold was coined in Europe in the middle ages, gold served as a store of value outside of 'money'. 'Money' was the social contract that basically said "If you help me with the harvest for two weeks, I provide you with one bag of flour and a few eggs every week throughout the winter." So money was the network of contracts about who owes what to whom (debt). If somebody still had a surplus at the end of the day, they could purchase a small piece of gold (asset) for preservation of wealth. Note that nobody would accumulate too many of these IOUs simply because you wouldn't know what to do with all the pancakes. Do you see the separation of wealth from debt?

Then people started coining gold and corrupted the system. The problem is that coining gold mixes the asset (physical gold) with the debt (if you give me the coin, i.e. the token for the debt, then I owe you a bag of flour). The result is that gold the wealth was undervalued in terms of gold the (token of) debt.

Before deposit insurance and central banks, this caused frequent defaults, for a funny reason: Gresham's law. If you coin gold, you get a perverse system in which there is a difference between "I have a gold coin in my hand" and "You owe me a gold coin" where both just mean "You owe me a bag of flour". I.e. you have (1) the token of debt and (2) someone owes you a token of debt. And this is where the system breaks. Rather then thinking about whether they can deliver the promised flour, the system gets hung up about delivering the tokens. And since the token (the gold coin) and the promise to deliver a token (gold denominated debt) have the same price by decree, but vastly different risks, it makes sense to hoard the token and to trade the debt. The system loses reserves (tokens) and eventually someone defaults. What's perverse about it is that nobody cared about delivering the flour and the eggs. But people got thrown in jail for failing to deliver the tokens.

Anyway, with deposit insurance and/or central banks and/or increasing hoards of savings, the discrepancy between the asset (the coin) and the debt (the promise to deliver a coin) only gets bigger, the gold is more undervalued, and when the system fails, then it fails on a grand scale (1933). The point in time at which gold was most undervalued in the history of the world was probably 1971. The U.S. had about 9500 tons of gold at that point. On Friday, August 13, 1971, the UK government presented them with $3bn for redemption in gold: 2600 tonnes (!!!!)

Note that most developing countries have already advanced from coining gold to separating gold (the wealth) from paper money (the token for an IOU). If people run out of tokens, no problem, they can be printed. No issue with failure to deliver tokens. People can concentrate on delivering the flour and the eggs. And even if they print tokens, hey, the individual token becomes worth a little less, but who cares. The real wealth is in gold (the asset).

Back to the future!

The fathers of the Euro must have figured this out at some point in the mid 1970s.

The point is that "gold the wealth asset" is worth a lot (!!!!) more than today's OTC currency market for gold shows (this is where unallocated gold, the promise to deliver allocated gold, is traded). We are talking about a different order of magnitude, say, one ounce of gold is the average gross annual family income in the U.S., or something like that.

So revaluation of gold will work because this is where gold belongs.

The other issue is that you can engage in a currency war. For example, the ECB can print Euros and buy gold and thereby get an advantage in international trade. A funny point is that they can prevent the U.S. from going back to a gold standard with a fixed gold price. The U.S. would either have to shut down international trade and capital flows or they would keep losing gold. So "back to the future" has already been insitutionalized.

I'm going to make some comments below. Thanks all for keeping it interesting. Given that it looks like Victor did a good job summarizing and responding, I am going to weigh in using quotes from his posts above.

Body: The latest round of ideas seem to center around replacing the USD with Euro as the world’s reserve currency...

Victor: ... I guess that companies will prefer other currencies in international trade.

I agree USD as global reserve currency is going down. I remain unconvinced that the Euro can replace it, nor should we accept it even if it could. We need to kill off the insane notion of fiat currencies and central banking.

Victor writes:

Yes, the U.S. have a lot of gold (by the way, I do think the gold exists). But the dollar has two problems that other currencies (Euro) don't have:

1) The U.S. runs a trade deficit of around 5% GDP...

The Euro zone in contrast has a balanced trade account. No pressure here.

It is important to understand why the US has such a relatively large trade deficit, and this is very important. The US trade deficit was created by the transition of the USD to fiat from having been previously been gold-backed. Pictures speak:

As soon as US feet were not being held to the fire by gold-convertibility, and disincentives against overprinting were removed, the trade deficit began. The situation will be no different if the world accepts a fiat Euro. That the Eurozone is currently roughly trade-neutral is irrelevant. Fiat is evil and must be extinguished from existence. Bretton Woods has been proven to be an unmitigated disaster. Let's not repeat it.

2) There are some $8000bn of U.S. debt held abroad which would love to be exchanged into gold.

The Euro zone in contrast does not have a huge Euro denominated debt held abroad. No pressure here.

Because the Euro-zone is very likely about to disintegrate, what is currently "internal" debt will soon become "external". We'd need data to argue this stuff properly.

I apologize for stopping here, an old friend has just arrived, and I would like to capture this...

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